The potential impact of the Labour manifesto on people's finances and long term savings

Labour has published its election manifesto with plenty of proposals that could have a big impact on people’s finances and long term savings.

AJ Bell’s analysts consider the key pensions and personal finance pledges put forward by the party.

Freeze in state pension age increases beyond 66

Make no bones about it – this is a gargantuan promise from Labour with enormous ramifications for those affected, society as a whole and long-term Government spending.

It is therefore incredible that the impact this will have on taxpayers doesn’t appear in the policy costings. This may simply be because planned increases in the state pension age run beyond the next Parliament, but such a short-term approach to something as vital to the long-term future of the UK as state pension reform is hardly encouraging.

Labour is also wrong to say the Conservatives have overseen a decline in life expectancy. While improvements in average life expectancy have generally decreased since 2010, this has not translated into an overall fall.

It’s also important to remember that planned state pension age increases to 67 and 68 are not just based on the last few years’ data, but decades of life expectancy improvements.

The increase in the state pension age to 66 currently underway is the first increase since the Second World War, during a period when life expectancy across the UK has risen at unprecedented levels. If state pension increases are to be permanently shelved, Labour needs to explain who will pay the extra cost in the long-term.

Uprate the state pension for British pensioners overseas

A quirk in the state pension system means people who retire to certain countries overseas do not benefit from uprating in line with the triple-lock, which increases the payment by the highest of average earnings, inflation or 2.5%. Over the course of someone’s retirement this could cost tens of thousands of pounds.

The reason for this is that a reciprocal social security arrangement needs to be agreed with the country the person is retiring to. Successive Governments preferring to focus state pension cash on people living and working in the UK.

There is also a Brexit element to this. At the moment UK nationals who retire to the EU automatically receive state pension uprating.

While the current Government has committed to continuing with this arrangement over the short-term, there are as yet no guarantees beyond the next few years. Presuming Labour’s pledge extends to UK nationals in all countries around the world, this could push the cost up considerably if we eventually leave the EU.

Restore Pension Credit for mixed-age couples

Changes introduced by the DWP to Pension Credit rules earlier this year mean pensioners can no longer apply for Pension Credit if their partner is of working age. Instead they have to apply for Universal Credit until their partner reaches state pension age.

This is important because a couple can usually receive £255.25 a week on Pension Credit, versus £114.81 on Universal Credit.

The Government’s decision to shift its approach here was unsurprisingly hugely unpopular and Labour’s planned reversal would be hugely welcome to those who are set to miss out.”

Pension tax incentives review

Labour has promised to review pension tax incentives, with a focus on the problems facing the NHS as thousands of doctors refuse shifts due to the impact of the annual allowance taper.

While scrapping the taper might be politically uncomfortable for Labour, it remains the simplest solution to the current crisis.

It is possible Labour’s review will go much wider than the taper, however. The party’s proposal to bring the 45p income tax band down to £80,000 and introduce a new 50p rate for those earning more than £125,000 is clearly designed to clobber higher earners – but it also has an impact on pension tax incentives.

Because pension tax relief is paid at an individual’s marginal rate, this reform will hand a bigger pension tax boost to those on the highest incomes. It is hard to imagine this is the intention of the most left wing Labour Party in a generation.

It therefore seems an almost racing certainty that, if Labour wins power and this policy is introduced, pension tax relief will be subject to yet more reform.

Automatic enrolment commission

Although automatic enrolment has been a success to date, there is a pressing need to look to the future and consider how we get the nation saving beyond the minimum of 8% of band earnings.

This is a difficult balancing act for whoever wins the election. Many will want to see auto-enrolment contributions increase substantially, but the risk in doing this rapidly is that opt-out rates could surge and businesses may cut investment as their costs mount, potentially strangling economic growth.

We therefore need a dual focus on both ensuring auto-enrolment is fit for purpose and improving member understanding of the benefits of retirement saving so more people take responsibility for their own financial future.

We also believe this commission should not just limit itself to auto-enrolment. The pension tax regime in the UK is a complex mess which risks putting people off saving for retirement, and is ripe for reform.

Given the intrinsic link between auto-enrolment and pensions taxation, it would make sense for the broader landscape to be considered and simplified, with the aim of increasing savings levels in the UK.

Pension Dashboard

The Pension Dashboard (or Dashboards) project has the potential to revolutionise retirement engagement in the UK. It is clear from all the consumer research conducted to date that a central Dashboard which everyone can access is an absolute necessity to maximise reach.

However, provided sufficient standards and protections are in place, there is no reason to limit the ambition of Dashboards to a single service. People engage with a variety of platforms in a variety of ways, and allowing them to see their pensions through any of these services would be a huge positive.

We agree wholeheartedly with the principal of getting costs and charges on Dashboards at the earliest possible opportunity. Doing this should help savers make better decisions as they become engaged and consider switching provider.

Income Tax

Sticking with their 2017 manifesto pledges, Labour will increase the number of people paying the 45% income tax rate, cutting the threshold from the current £150,000 down to £80,000, and introducing a new 50% rate for those earning more than £125,000. The move will cost taxpayers £5.4bn.

The party will also bring the tax on gains from investments in line with income tax, echoing similar pledges by the Green Party. The pledge to bring capital gains and dividends into the income tax regime will raise £14bn for the Government. The move to crack down on dividends will hit business owners who pay themselves through dividends rather than income, but also investors, with the capital gains tax allowance being slashed from £12,000 to £1,000 – which will cost up to £4,400 a year for those earning £50,000 or more.

Student loans

Labour has long said it would scrap tuition fees, so it’s no surprise to see this £13.6bn pledge in the manifesto. What is more surprising is that they haven’t said they will wipe off the debt of current graduates, which the Green Party has pledged. Instead, they will review the current loans and come to a conclusion later, which will be of little comfort to the average graduate who leaves university with £50,000 of student loan debt. While also being a big spending commitment, the move to wipe out existing debt for everyone would be a bigger giveaway to higher earners, who would pay off the full sum before it’s wiped out after 30 years – which might be why Labour dodged the move.

Families

Labour becomes the third party to look to extend childcare funding, particularly when children are younger. However, it says it will ‘extend childcare provision’ to parents of one-year-olds, rather than explicitly offer free childcare for these parents, like the Liberal Democrats pledged. It will extend free childcare hours for children aged two to four, and will increase the amount paid to nurseries for these hours.

They will also boost maternity pay, giving an extra three months by extending it from nine months to 12 – giving new mothers a near £2,000 boost if they take the full year off work. They will also increase paternity pay to four weeks and increase the pay for the first week by £226. In another move for families, Labour will also reverse the controversial two-child cap on child benefit.

Labour would also scrap the Marriage Allowance, which is a little used tax break that gives couples where one is a basic-rate taxpayer and the other is a non-earner or low earner the ability to transfer their tax-free income. The Lib Dems also pledged the scrap it yesterday. It’s not a massive revenue raiser, costing the government less than £500m in the current tax year and claimed by just 1.8m people, but it fits with Labour’s pledges for equality, as it’s only available to married couples or those in a civil partnership, and not those co-habiting.

Housing

A rent cap would be brought in under a Labour Government, to ensure renters only saw inflationary increases in their annual rent, in order to boost their ability to save for a first home. Labour also says it will reform the Help to Buy scheme to exclude higher earners, although offers no specifics on who will be included and excluded.

Labour has said it will give councils the ability to charge more tax on empty properties. Councils already have the power to charge 200% council tax rates on second homes, but homeowners discovered a loophole to avoid this tax by designating the properties as holiday homes. It looks like Labour will aim to close this by bringing holiday homes into the council tax additional levy. It’s not clear exactly how they would do this, but they say it could raise £560m a year.

Inheritance tax

Labour previously talked about plans to scrap inheritance tax in its current form and instead give everyone a gifting allowance of £125,000 during their lifetime – with anything above this taxed at income tax rates. However, these plans were curiously absent from the manifesto, with the party just saying it would ‘reverse cuts to inheritance tax’, so scrapping the residence nil rate band. While a complex tax that’s little understood, scrapping it will be a blow to those who wouldn’t count themselves as rich but have gained property wealth through rising property prices.

These articles are for information purposes only and are not a personal recommendation or advice.